Right Thinking from the Left Coast

Tag: Standard and Poor

To circle back to the most pressing topic of the day: S&P may be nitwits but their downgrade of our debt was utterly correct. We have not made any real inroads on our staggering debt load, the hysterics over the debt ceiling not withstanding. Until we address entitlements, we’re not serious. The S&P downgrade is not some esoteric financialspeak that has no relevance to us. It’s the canary in the coal mine: the warning that we’re heading toward very serious problems.

But the WaPo makes a good point this morning. If we want to get out of this, we should be more like Canada. Seriously:

A quick Canadian history lesson: in the early 1990s, things were looking pretty grim. The country had regularly run fiscal deficits since the 1960s. In 1993, stood out among the G-7 as having the most foreign indebtedness. As one analyst noted, “From the beginning of 1990 to the end of 1993, Canada experienced a long slide in economy activity and employment.” The country lost its AAA rating in 1993. Feel familiar?

Facing an unprecedented fiscal crisis, Canada got down to work. The country passed a landmark budget in 1995. The plan tilted heavily towards cutting expenditures but also included some new revenue (the ratio was about $7 in cuts for every $1 of revenue). Canada cut the civil service by about 25 percent and overhauled its pension program. The plan worked. Canada is now on much more financially-sound footing; S&P restored its AAA rating in 2002. The turnaround is now referred to, in some economic literature, as “The Maple Leaf Miracle.”

The heavy ratio of spending cuts to tax increases was because Canada had high taxes to begin with. But they are not alone in restoring their debt rating this way. Australia, Denmark, Finland and Sweden also restored their ratings. They got there in different ways but they all had something in common: they didn’t stick their thumbs up their asses and wait for the problem to solve itself. Restoring the debt rating wasn’t the goal, per se. But it was a useful harbinger of their overall finances. When S&P upgraded them, it was a sign that things were finally under control.

We’re not serious yet. Despite Obama’s supposed overtures on the subject, his party remains diametrically opposed to entitlement reforms (Pelosi has made it clear she will oppose any “grand bargain”). Last night’s GOP debate saw all the candidates oppose a theoretical 10-to-1 cuts to tax hikes deal. The so-called “Super-Committee” is being rigged for failure.

I don’t know what it will take for us to follow Canada into serious reform. Maybe another downgrade or stock market crash. But we can’t put with this shit any longer. We can’t afford to.

There will be a lot said and a lot of finger-pointing. I’ll have more to say later (I’m traveling). But this is simply the result of 11 uninterrupted years of fiscal recklessness capped by a knock-down drag-out blue-in-the-face fight over spending cuts that wouldn’t impress the most gullible subprime loan company.

We brought this on ourselves. All of us.

Update: It bears pointing out that S&P gave AAA ratings to mortgage-backed securities. So they may be out to lunch. But the refusal to budge on either entitlements or taxes is scaring the markets.

Well, frankly, I don’t blame Standard and Poor’s. And not because we didn’t make deeper cuts–we have lower debt loads and more favorable demographics than countries like France and the UK which still have their AAA. S&P is apparently telling us exactly what this is about: the frightening breakdown in our political system. Unless those reports turn out to be wrong, everything else is excuse-making.

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That means that in order to make a plausible deal, both parties are going to have to hold hands and jump together . . . and yes, that’s right, GOP, I mean compromise. I mean higher taxes. I don’t like it. But I also don’t see any way around it. Any party that tries a unilateral solution will simply be removed from office the next time around.

The Democrats played their role, obviously, by going hysterical over even the most mild budget cuts. But keep this in mind: a large fraction of the Tea Party wanted us to not raise the debt ceiling at all.